Canadian dollar slips despite strong GDP

The Canadian dollar is slightly lower in the Tuesday session. In North American trade, USD/CAD is trading at 1.2798, up 0.47% on the day.

Canada’s GDP overperforms

Canada’s economy provided an early Christmas present, with a strong GDP reading for Q3. GDP showed a robust gain of 5.4% y/y, which was better than expected. This points to a sharp turnaround after the economy contracted in the second quarter. A major driver for the strong gain was consumer spending, as health restrictions were eased and consumers were able to shop and spend. The economy grew by 0.8% in October m/m and has almost completely recovered to its pre-pandemic level of February 2020.

The GDP news was more than welcome, but lurking in the background are gnawing concerns over Omicron, the newest variant of Covid which has been spreading and caused panic in the financial markets last week. The Canadian dollar has paid the price as nervous investors have dumped risk assets in favor of safe-havens, such as the Swiss franc and the Japanese yen. Earlier in the day, USD/CAD climbed to 1.2836, its highest level since September 21^st.

The Omicron variant of Covid-19 has led to significant volatility on global financial markets, and market participants should be prepared for this trend to continue until health officials are able to determine just how serious a threat is posed by Omicron. Fed Chair Jerome Powell is testifying before a Senate committee, and his prepared testimony stated that Omicron could slow the US employment market and exacerbate supply chain disruptions. Powell reiterated that he expects inflation to ease sometime in 2022, but I would not be surprised if Powell faces some tough questioning from the US lawmakers, with inflation running at a 6 per cent clip.

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 USD/CAD Technical

• There is support at 1.2681. Below, there is support at 1.2569
• We find resistance at 1.2740 and 1.2852

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